TMI Blog1963 (2) TMI 46X X X X Extracts X X X X X X X X Extracts X X X X ..... g terms: 1955-1956 288 1956-1957 383 1957-1958 32 The appellant appealed to the General Commissioners, who discharged the assessments, as they were of the opinion that the sums involved were not liable to tax. The Revenue then appealed to the Court of Session, who reversed the commissioners, and now the appellant before your Lordships seeks to restore the finding of the commissioners. The simple facts of the case necessitate a close examination of Chapter II of Part VI of the Income Tax Act, 1952. That chapter is headed Expenses Allowances to Directors and Others and contains provisions first enacted in 1948. The material part of the first section in this chapter, section 160, reads as follows: Subject to the provisions of this chapter, any sum paid in respect of expenses by a body corporate to any of its directors or to any person employed by it in an employment to which this chapter applies shall, if not otherwise chargeable to income tax as income of that director or employee, be treated for the purposes of paragraph 1 of Schedule IX to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... subject to tax. The first question that falls for consideration is whether the sum which was spent by the company in discharge of owners' rates, feu duty and for insurance can properly be regarded as expended in the provision of living accommodation for the appellant or in connection therewith. In my opinion, it cannot properly be so regarded. As owners of the property Deaseholm the company had to pay owners' rates and feu duty and it was to their interest to see that the property was insured. The Solicitor-General in the course of his clear and interesting argument contended that, as the purpose of the sale by the appellant to the company and of the letting to the appellant was to relieve the appellant of expenditure in relation to the property which he was unable to afford, any expenditure incurred by the company in relation to Deaseholm was to be regarded as expenditure for living accommodation for him. He maintained that it was less expensive to rent than to own and that consequently any expense incurred by the owner of the property who is a body corporate in relation to premises let to a director was in, or in connection with, the provision of living accommod ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of the subsection. Expenses which come within the scope of the subsection are to be treated as if they had been incurred by the director and as if they had been refunded to him as a payment in respect of expenses. Such payments are made subject to tax by virtue of section 160 unless, of course, the director can show that they were wholly, exclusively and necessarily incurred in performing the duties of his office. Subsections (2) to (5) of section 161 are provisions exempting from the scope of section 161(1) certain categories of expenditure which would otherwise be included. Section 162(1) reads as follows: Any expense incurred by a body corporate in the acquisition or production of an asset which remains its own property shall be left out of account for the purposes of the last preceding section. Section 162(1) thus takes out of the scope of section 161(1) all expense incurred in the acquisition or production of an asset provided that the asset remains the property of the body corporate, no matter to what extent the acquisition or production of it may enure to the benefit of a director or other employee to whom Chapter II applies. Asset and production of an asset ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y was so assessed in respect of Deaseholm, the amount to be treated as added to the appellant's income would be ? 26. As the company was not so assessed, by virtue of section 161(1), ? 148 is to be deemed to be added to his income. The words in brackets in section 162(4) do not appear in section 162(3), but despite their absence it is, I think, clear that in a case to which section 162(3) applies, any other expense which comes within 161(1) and not within section 162(1) is to be treated as added to the director's taxable income as well as a sum equal to the Schedule A assessment so reduced. These words in brackets were not, in my opinion, intended to add, and do not add, to what is contained in section 161(1). They make it clear that the amount to be treated as forming part of the taxable income is not limited to an amount equal to the annual value of the use of the asset. It follows that unless the amounts spent by the company on repairs are to be regarded as coming within section 162(1), the appellant is liable to be taxed on an amount equivalent to the annual value and also on the expenditure on repairs. Many instances can be given of the manifest unfairness o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or not that particular item of expenditure produced an asset which remained the property of the company. I think one is entitled to look at the position before the repairs are executed and to contrast it with that after their execution. Before they were executed the company owned premises with a defective water main, defective plumbing, a defective chimney, defective fireplaces and a defective roof. After their execution they owned premises of a very different character. The creation of premises of such a different character can, I think, legitimately be regarded as constituting the production of an asset. For these reasons, in my view, the commissioners were right in holding that the sums involved in this case were not liable to tax. The case would, I think, be different if the company had executed repairs the cost of which is normally borne by a tenant; then it might well be said that the tenant had received a benefit in kind. I would only add that I agree with the views expressed by my noble and learned friend, Lord Reid, with regard to the attempt by the Revenue to mitigate the injustice to the appellant, if their contention be right, by two concessions neither of which, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pondents goes so far as this. If extensive dry rot were discovered during the tenancy and it cost the landlord ? 5,000 to deal with it, the whole of that ? 5,000 would be a benefit in kind to the tenant for the particular year when the money was spent, so that, although the tenant got no more than he had bargained and paid for--a habitable house--but had suffered great inconvenience, his income for that year must be held to be inflated for tax purposes by ? 5,000. Now I must turn to the relevant sections of the Income Tax Act, 1952, to see whether they do require us to reach that wholly unreasonable result. The Consolidating Act of 1952 includes in Part VI, Chapter 11, a number of sections which were first enacted in 1948. The heading of the chapter is: Expenses Allowances to Directors and Others. Before this legislation the position was that under what is now rule 1 of the Rules applicable to Schedule E in Schedule IX tax was chargeable in respect of all salaries, fees, wages, perquisites or profits whatsoever for the year of assessment. Those are wide words, but it is common knowledge that it was thought in many quarters that in spite of this provision the growing practice o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion...(3) Where a body corporate is assessable under Schedule A in respect of any premises the whole or any part of which is made available by it as living or other accommodation for any of its directors or employees, and either the body corporate pays no rent in respect of the premises or the annual amount of the rent paid by it is less than the amount of the assessment on the premises as reduced for the purposes of collection, the provisions of the last preceding section shall have effect as if the body corporate paid in respect of the premises an annual rent equal to the amount of the assessment as so reduced. (4) Where an asset which continues to belong to the body corporate is used wholly or partly in the making of any such provision as is mentioned in subsection (1) of the last preceding section, and the asset is not premises in respect of which the body corporate is assessable under Schedule A, the body corporate shall be deemed for the purposes of the last preceding section to incur (in addition to any other expense incurred by it in connection with the asset, not being expense to which subsection (1) of this section applies) annual expense in connection therewith of an am ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se is concerned. If a company provides a house for its directors -or for anyone else--it not only provides the house when the director's tenancy begins but in any ordinary sense it continues to provide the house throughout the tenancy. And in any ordinary sense its expense in connection with the provision of the house will include all expense which it has to incur in order to continue to provide the house, that is, all expense which it has to incur as owner during the tenancy. To read the word provision as limited to the provision of the house when the director enters into occupation would in many cases defeat the obvious intention of the section. For instance, if a company takes a lease of a house and then permits the director to live in the house, such a limitation would exclude the rent paid by the company from the scope of the section, although living in a house for which the company pays the rent is an obvious benefit. How, then, are we to resolve the difficulty? To apply the words literally is to defeat the obvious intention of the legislation and to produce a wholly unreasonable result. To achieve the obvious intention and produce a reasonable result we must do some ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd repairs. But I do not see how this line of escape can afford a remedy as regards feu duty and owner's rates. The second possible way of getting over the difficulty is by interpretation of the words made good in section 161(1). The natural interpretation of this provision seems to me to be that you add up all the expense caught by section 161(1) and then deduct from the total all sums paid by the director to the company in connection with the provision of living accommodation or other benefit. And that is what the respondents have done. They have deducted the rent from the expense which they say is caught by section 161(1) and based the assessments on the balance. But it is, I think, possible to say that where you have, as in this case, a lease at a full commercial rent or rack rent, the rent must be regarded as full consideration for all expense which the lease obliges the landlord to incur, and therefore payment of the rent makes good to the landlord all such expense. Page No : 0711 I do not much like that argument, but again I would be prepared to accept it as a way out, and it would be sufficient to decide this case in favour of the appellant because it has bee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ther the supposed refund would have been a sum paid in respect of expenses within the meaning of section 160(1). Expenses are not defined in the Act. But it is surely unarguable that these words could apply to a sum paid to a director to enable him to pay expenses incurred by the company for some purpose which conferred no benefit on him. Of course, there may be borderline cases, but if the expense incurred Page No : 0712 by the company conferred on the director no benefit at all, no advantage beyond what he has under his pre-existing legal rights, I cannot think that handing to the director the sum necessary to meet the bills could possibly come within section 160(1). And that is this case. By the expenditure with which this case is concerned the appellant got absolutely no benefit or advantage to which he was not already entitled under his lease, and the lease was admittedly a genuine contract entered into at arm's length. If it is right that, in order to avoid imputing to Parliament an intention to produce an unreasonable result, we are entitled, and indeed bound, to discard the ordinary meaning of any provision and adopt some other possible meaning which will avo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a director, I find that the clear purpose of the subsection is to add something to the expense already caught by section 161(1) (and not excluded by section 162(1)). What has to be added is an amount equal to the annual value of the use of the asset. That must mean the use by the director, and where the director pays a rent the value to him of the use of the house can hardly be much less than the rent or he would not pay it. So we are directed to add together the rent and all the landlord's expenses caught by section 161(1), and then section 161(1) permits the deduction of what is made good by the director, which, as I have said, can only be the rent if the ordinary meaning of the words is taken. The result is that the rent cancels out and we are left, in every case where a house is let at a market rent, with the position that the whole of the landlord's expenses--owner's burdens and repairs--is to be charged as a benefit in kind although the director is already paying in rent a full annual return for the house which he occupies. This result is so absurd and capricious that even the Inland Revenue shy at enforcing it. In the present case each assessment is ab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fruitful argument as to whether it represents improvement or repair, but, provided it is reasonable tenant's repair, it seems to me to be taxable. If that amounts to a finding that there was no obligation on the company to do these repairs and that under the lease responsibility for them rested on the tenant, then the decision was plainly right because by carrying out and paying for the repairs the company clearly conferred a benefit on the director by doing and paying for something which benefited him and which the lease did not oblige them to do. The construction of section 162(4) did not arise and the learned judge's observations about it were obiter, because in Northern Ireland the landlord and not the tenant is assessable under Schedule A and therefore the case fell within section 162(3). On the whole matter I am clearly of opinion that this appeal should be allowed. LORD JENKINS. My Lords, this case concerns the liability (if any) to income tax, Schedule E, of the present appellant, Mr. William E. Luke, in respect of benefits in kind within the meaning of the income tax legislation, claimed by the Commissioners of Inland Revenue to have been received by him ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... puted assessments would prima facie appear to have been as contended by H.M. Inspector of Taxes before the General Commissioners and included in the case stated by them in these terms: Mr. G.W. Yule, H.M. Inspector of Taxes, contended on behalf of the Crown (inter alia): (1) That the company for the years under consideration had expended the sum of ? 950 on or in respect of the house which the company had acquired from the respondent in order to provide him with accommodation therein; that the company had, during the same period, recovered from the respondent only ? 247 as rent and that the difference between these two sums, namely, the sum of ? 703, fell to be regarded as part of the emoluments of the respondent, assessable to income tax for the years under consideration pursuant to the provisions of sections 160 and 161 of the Income Tax Act, 1952. (2) That the assessments for the three years in question were properly made and should be confirmed. This deceptively simple statement has been the subject of much discussion. I will not by any means attempt to raise all the arguments used or touched upon. One point was to the effect that section 161(1) was not applicable to a cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l to be treated as a perquisite of his employment and included in his emoluments for income tax purposes. In addition to the expenditure by the company on the house the Revenue were entitled under section 162(4) of the Act of 1952 to charge the annual value of the use of the asset, which as the rent was a fair rent would not have been less than the rent. The Revenue, however, by a purported concession made under the proviso to section 162(4) in regarding the feu duty as the rent or hire of the house only charged the feu duty and made no addition in respect of the annual value of the use of the house. This was, in my opinion, based upon an entirely mistaken view of section 162(4). The result of the contentions of the Revenue on section 162(1) and a proper interpretation of section 162(1) would be that there fell to be added as a perquisite to the appellant's income the rent of the house plus all the other landlord's charges under deduction only of the rent as having been made good. The manifest absurdity of these contentions can be shown by taking a few examples. During the director's occupancy the house develops dry rot which has to be made good at a cost far exceedi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot agree. Section 161(1) invokes the not unfamiliar method of a fiction. The expenditure under section 161(1) is to be treated as sums paid in respect of expenses to a director under section 160(1) and thus becomes a perquisite. Nor am I impressed by the argument that as the rent was a fair rent the company's expenditure has been made good by the payment of that rent and the counter obligations undertaken by the tenant. The interpretation which I put on this part of section 161(1) is that in each year one side of the account shows the expenditure by the company and the other side any payment by way of rent or any other payment by the director to the company and the balance is to be treated as expenses paid to the director. So far I am in agreement with the opinions of the Lord President and Lord Guthrie. But it is when I turn to section 162(1) that I am unable to follow their reasoning. Section 162(1) provides as follows: Any expense incurred by a body corporate in the acquisition or production of an asset which remains its own property shall be left out of account for the purposes of the last preceding section. In this connection the Lord President says 1962 S.C. 218, 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed that the whole expenditure in excess of the rent was not assessable. Upon the information contained in the stated case my opinion is that the expenditure on the new hothouse boiler, ? 66; the renewal of two fireplaces, ? 41; the laying of new water main and renewing the plumbing, ? 489, involved production of assets and falls to be excluded under section 162(1). This would leave as expenditure owner's rates, insurance, minor repairs and feu duty which total ? 128, but against this figure would have to be set the rent of ? 148, so that for the year to September 31, 1956, no perquisite would fall to be added to the appellant's income. I have had more difficulty with the year to May 15, 1957. Having in view my interpretation of section 161(1), I regard all the expenditure for that year covered by this section. There would upon this reading of the section be a balance of ? 127 which would fall to be added as a perquisite to the appellant's emoluments. But as the majority of your Lordships take the view that all the assessments should be discharged, I do not dissent. The amount involved is in any case small. I would allow the appeal. LORD PEARCE. My Lords, I agre ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
